- Maintain BUY on MSM Malaysia with an unchanged fair value of RM5.70/share. Our fair value implies a FY15F PE of 14.9x.

- MSM’s FY14 results were above consensus estimates and our expectations. In spite of a 3.9% fall in operating profit in FY14, MSM’s net profit inched up by 0.9% supported by a fall in zakat expense. MSM’s operating profit was affected by a 40.6% increase in selling and distribution expenses in FY14.

- MSM’s sales volume was robust in 4QFY14. Sales volume of MSM’s sugar products improved by 13.6% QoQ to 278,000 tonnes in 4QFY14 after a 9.1% decline in 3QFY14. MSM’s sales volume in 4QFY14 of 278,000 tonnes was even higher than 2QFY14’s festive-driven demand of 269,091 tonnes. We believe that MSM gained market share from Tradewinds Group in 4QFY14.

- The QoQ growth in sales volume in 4QFY14 was mainly driven by industrial customers, which recorded an increase in purchases of 30.4%. Sales volume of sugar to the domestic distributors segment declined by 3.0% QoQ in 4QFY14 while the exports division chalked up an expansion of 25.8%.

- After a poor 3QFY14, MSM’s net profit recovered by 56.3% QoQ to RM75.0mil in 4QFY14. Gross profit margin improved from 16.0% in 3QFY14 to 23.0% in 4QFY14 as there was less usage of raw sugar under the long-term contract (LTC).

- We believe that there was only one shipment of raw sugar from the LTC in 4QFY14 versus three in 3QFY14. Recall that raw sugar sourced under the LTC is more expensive than free market sugar.

- Sales volume of MSM’s refined sugar products grew by 6.5% in FY14. Although domestic distributors reduced their purchases by 9.3% in FY14, this was more than offset by a 51.5% increase in demand from industrial customers. Some customers were reclassified from domestic distributors to industrial.

- Average selling price of refined sugar to the industrial customers eased by 1.8% in FY14 while selling prices of exported sugar inched down by 1.9%. This was in line with the fall in raw sugar prices.

- MSM’s gross profit margin edged up from 19.8% in FY13 to 20.5% in FY14 due to cost savings of RM27mil and lower cost of raw sugar. According to Bloomberg, average price of raw sugar declined by 7.0% from US$0.1893/pound in FY13 to US$0.1761/pound in FY14. On the other hand, the Ringgit weakened by 3.8% from an average of US$1.00:RM3.1501 in FY13 to US$1.00:RM3.2729 in FY14.

Source: AmeSecurities